Scenarios and full revaluation

Scenarios measure the effect of a specified market move by changing inputs, rebuilding the affected market objects and repricing the trade. Comparing the revalued change with the sensitivity estimate shows how well a local linear approximation describes that move:

\[ \Delta V=V(q+\Delta q)-V(q),\qquad \Delta V_{\rm linear}=\sum_j \frac{\partial V}{\partial q_j}\Delta q_j. \]

The difference can reflect curvature, a change in exercise or payoff behavior, and recalibration effects omitted from partial model sensitivities.

Ordered input transformations

A Scenario contains ordered Shock definitions. An absolute shock adds its value; a relative shock multiplies by one plus its value. The target matches an exact identifier or requires every underscore-separated target segment to occur in the input identifier. Segment order and multiplicity are ignored. The exact-string branch does not prevent that same target from matching other identifiers through the segment rule.

A fully qualified identifier is therefore not a universal exact-only selector. Repeated tenor/expiry tokens can make targets overlap, so constructing one shock per full quote identifier can move some quotes more than once. For a parallel family stress, prefer one family selector and verify the transformed values of every affected quote. An isolated finite-difference bump requires checking the actual matched set rather than assuming the target is unique.

This fragment assumes an existing context, trade and compatible pricer:

let scenario = Scenario::new(vec![
    Shock::new("OIS_USD_SOFR", 0.0001, ScenarioType::Absolute),
    Shock::new("CapletFloorlet_USD_SOFR", 0.10, ScenarioType::Relative),
]);
let stressed_market = scenario.apply(&context)?;
let stressed = pricer.evaluate(&trade, &[Request::Value], &stressed_market)?;

The first change adds one basis point to matching OIS rate quotes; the second scales matching optionlet volatilities by 1.10. Overlapping transformations compose in supplied order. All available quote levels are transformed, then the context’s selected bid/mid/ask level is consumed.

Direct zero-rate quotes can also be targeted. A funding spread curve may expose ZeroRate_EUR_FUNDINGSPREAD_<tenor> identifiers; targeting FUNDINGSPREAD changes all matching spread quotes. Historical fixings and spot FX are not implied targets of this quote mechanism. Empty targets, nonfinite shocks and unmatched selectors are errors.

Independent views and construction

scenario.apply(&context) returns a borrowed MarketDataProvider with an independent cache. The base observations and constructed objects remain unchanged. Requests rebuild affected dependencies; unrelated simulations are not generated. Unchanged calibrated data can be reused with detached AD wrappers. An affected simulation uses its configured seed when rebuilt.

In Python, the corresponding scope is with context, scenario:. The innermost active context supplies the base market, nested scenarios compose in entry order, and scope exit releases temporary state even on exceptions. Define scenarios separately from the context constructor.

Local validation and stress interpretation

For one input, a central comparison uses

\[ \frac{V(q+h)-V(q-h)}{2h}. \]

Use identical seeds, grids, policies, payment selection and quote levels. Check that only the intended target moved. Vary \(h\) to distinguish curvature from solver/sampling noise; one finite difference is not a universal truth about a derivative.

For a broad stress, report the full revalued change and the assumptions it reconstructs. A large parallel funding shock can change the whole composite discount curve, whereas a derivative row is local to one rate pillar. Credit, prepayment and smoothed script behavior can also make stress results depart substantially from a linear ladder.